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Noting America’s ominous double deficits, Bundesbank President Ernst Welteke questioned how sustainable the U.S. led global recovery was leading into this week. On Monday Warren Buffett announced he was invested in foreign currencies – “To hold other currencies is to believe that the dollar will decline” WB – and that left unchecked the U.S. trade deficit “will lead to major trouble.” Yesterday the ECB, taking one of its regular pot shots against the States, said that “artificially stimulating the economy by large budget deficits and inflationary monetary policy” as “no viable option”.
Could all these worry warts be out to lunch? Is the U.S. not embarking upon a sustainable economic recovery that will supposedly, eventually, create millions of jobs?
GDP Glee
Using the seasonally adjusted figures, 3Q03 GDP was up by either 5.1% or 3.3% year-over-year (using the real versus chained (1996) dollars respectively). Using the same methodology 3Q03 GDP was up by 2.2% and 1.7% respectively quarter-over-quarter. I know, GDP was reported to be up 7.2% in 3Q03, not 5.1%, 3.3%, 2.2%, or 1.7%. However, the above numbers - computed directly from a BEA download of historical GDP statistics (Excel) – are the statistics the government uses before the Fisher formula (baked in with an implicit price deflator’?)
I am not trying to take anything away from what was clearly a strong quarter for the American economy. Rather, and even though government procured economic statistics are as rigged as Enron’s books ever were, there were far to many reports from the government, companies, and other sources to argue that economic activity in 3Q03 was not spectacular. Nevertheless, I’ll admit that I don’t understand exactly how GDP is computed, and I would venture to say that anyone with an average degree of intelligence can’t figure it out unless they are extremely dedicated to the cause. Point being, the BEA usually guesses the right trend in GDP – something a monkey can do after the fact - yet only in few years time and after multiple statistical and methodology revisions will we really know if 3Q03 GDP was all it has been cracked up to be. Remember that the U.S. economy entered recession in the first quarter of 2001, and we didn’t find out until mid-2002? In short, 3Q03 was a strong quarter, but perhaps not as strong as the ‘best in 20 years’ numbers suggest.
As for yesterday’s GDP release being a sign of a sustainable economic rebound -- to borrow a phrase from economists who ignored job losses month after month this year, GDP is a ‘lagging indicator’. What ‘LI’ means is that the GDP number does not tell us what is going to happen in the U.S. economy tomorrow, but what happened yesterday. This is especially the case given that temporary economic stimulus via the refi boom and Bush’s tax rebates are not likely to be duplicated going forward.
As for the markets, with stocks rallying strongly in anticipation of the current economic updraft we could be entering a period when anything less than 4% 4Q03 GDP is considered a disappointment. Why? Because those same economists previously predicting bottoms in stocks, capital spending, confidence, jobs, etc., could soon be staring at an ominous 3Q03 GDP peak leading into 2004 if the aforementioned drains on GDP – lack of refi and tax rebates – are not met with continued strength in other areas of the economy. On the plus side, business investment looks strong (albeit potentially fickle to interest rate movements) and inventories should be padded (inventory building is the proverbial ‘ace in the whole’ of all optimistic economic outlooks).
As for 3Q03 forecasting the future of the U.S. economy, it doesn’t. Rather, and as Krugman suggests in his column today, the U.S. economy is more prone to start and stops now than ever before (remember what the likes of Welteke, Buffett and the ECB argue), because growth is being ‘borrowed from the future’. Whether it is the U.S. government running larger deficits or U.S. consumers taking on more debt, each has (as yet unidentifiable) limits of expansion.
When all else fails, talk to the slime bucket
In a mockery of journalism that no one but me will ever take the time to comment on, Harvey Pitt was quoted in USA Today as saying “The SEC staff has been diligent, creative and productive. Mr. Spitzer's comments are both wrong and pernicious. They hurt public investors and don't help anyone.”
What makes the above quote repugnant is not that Pitt doesn’t try to make a point, but that the best quote USA Today could come up with to defend the SEC’s honor is a disgraced former SEC boss that accomplished absolutely nothing during his brief and conflict filled tenure. As for Pitt’s suggestion that Mr. Spitzer’s comments were ‘wrong and pernicious’ – well, if Spitzer is trying to go against powerful accountants, corporations, and the SEC, isn’t this the point? How Pitt deludes himself into believing that ‘public investors’ are hurt by Spitzer’s words is anyone’s guess.
As for Spitzer, I don’t care if he is attacking Street malfeasance so he can become a Princess in parade, at least he is doing something that helps the average investor better understand how the Street steals their money. The SEC on the other hand – including former big talkers and do nothings Levitt, Unger, and Pitt - should stop pointing fingers at Spitzer and FASB boss Herdman for trying to make a difference and start doing something other than collecting fines and slapping companies on the wrist. The SEC could start by simplifying any of the three financial statements that over the last few decades have helped turn informative 10-20 page 10Ks into 100-200 page novels.
In short, for better or worse, people like Spitzer and Greenspan will be remembered because they accomplished things. Who is Harvey Pitt?
Bears Bide Time
Bloomberg’s Baum recently asked me ‘so are you always bearish. Kind of like Jim Grant?’ The answer to this loaded question – one which market bulls are exceptionally good at asking when the markets are rallying – is not that I am a bear or bull per se, but an investor first. To be sure, declining to purchase a condo in Florida doesn’t mean you hate sunny weather. Rather, you may simply not like the current market price for condos.
Rarely a week goes by when some foreign central banker, noteworthy investor, or clan (i.e. the IMF) does not rip U.S. policy as being both the rehabilitator and potential destructor of global growth. These voices, often times, like Pitt, have alterative motives. However, in the case of Buffett (who would be just as pleased if the dollar remains strong), and Welteke (who was simply voicing possible future outcomes based upon available knowledge), honesty sometimes seeps through the cracks.
The knowledge to be taken from government statistics and corporate reports is that the U.S. economy is hitting on all cylinders. Yet these reports do not go into explicit, understandable detail about what is turning the engine over, how sustainable the fuel supply is, and whether or not the economic engine has enough steam to take on more passengers. Based purely on economist estimates and anecdotal reports (based upon CG&C and daily news releases) the U.S. economy added jobs in October…perhaps more jobs than many suspect? However, today’s gauges, as recent history has proven, can quickly change direction.
In short, owning U.S. stocks right now is extremely risky. Not only are a crazed mob of investors - unfazed with handing their money to thieves - clamoring into the markets (via mutual fund inflows), but the Fed continues to promise to go all out to ensure solid job creation. If the Fed fails – more specifically if supply side tactics fail – the outcome for the U.S. economy could be treacherous. In this regard, each Fed pledge of unwavering support is treated as the gospel – just as it was in late 1998…the Fed is so on the ball they can’t fail?
If the U.S. economy lives up to expectations most stocks will squeeze out gains, and if the money flowing in from bond/money market funds keeps rolling this could certainly propel stocks to very decent gains. As for the mostly sidelined equity investor that is dabbling in gold, and currencies -- the optimistic ‘bulls’ wonder how long their steadfast ‘bearish’ opinion on the markets will hold. The bears reply, “we probably won’t have to hold out as long as the bulls did from early 2000 to late 2002”.
If Harvey Pitt can delude himself into believing that he never did anything crooked, bears can easily convince themselves that Greenspan has accomplished the unthinkable yet again. However, so long as the means by which the U.S. economy is growing on are regarded by ‘bears’ as potentially/inevitably detrimental to the long-term health of the economy, bears and bulls shall remain forever divided.
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